Best location for student property investment?
Big cities do not always guarantee big yields – in many cases it’s the second-tier locations providing the highest sustainable yields. Location is really important, but why? What should we consider and be mindful of in these UK university towns and cities?
- A clear under-supply of purpose-built student accommodation verses the number of students in the area.
- Distance to the university campus or campuses, town centre and transport links – students’ sought-after accommodation with everything on their doorstep – its proven to maintain high occupancy levels and even dictate a premium.
- Expansion plans of the universities like an additional campus, specialist study centres or renovations of the main building – the master plan to increase student numbers for future years in-take.
- Re-generation areas in the city or town – this attracts overseas & domestic students, creates perfect job opportunities for undergraduates and better levels of appreciation for investors.
Why is student property sold off-plan?
Investing in an off-plan property is simply as it sounds; you’re buying based on an architects’ floor-plan and the property is yet to be built. Vast majority of purpose-built student accommodation is purchased by the investor during the construction for a number of reasons and benefits. Completed and operational student accommodation is also available.
- Many off-plan student projects are buyer-funded therefore you will earn interest on the deposit you have paid to the developer for your property normally between 3% – 7% p.a.
- Pre-launch? This is the perfect time for you to get an early-bird incentive e.g.1% – 2% extra on annual yield or a discount from the purchase price e.g. £2,500 discount on first 50 units sold.
- Off-plan prices are around 10% lower than market value during construction, therefore by the time the development has completed, the apartment would have increased by 10% and also increased in-line with current market value.
- First pick of units – with the entire project or phase available this is another reason why investors like to invest early into the development. High floors, units with balconies and penthouses or duplexes are often the first to be snapped up.
Read full blog “What are the benefits to buying off plan?”
How Purpose-built Student Accommodation projects are funded?
This needs to be broken down into two sections as funds are required to buy the land and cash-flow/funding is needed to build the development.
Read full blog “How do developers fund their off-plan property developments?”
Buying the Land
The developer will set up an SPV so each development site has its own entity and depending on how the build is funded the developer will ring-fence the monies used exclusively for a development.
Commonly the land is purchased with use of:
- Profit made from the last completed development
- A Bridge-Loan (see below)
- An investor or consortium of investors seeking a return once the project is complete
- An investor or consortium that will buy the freehold from the developer
Building the Student Property
Buyer-Funded is where the developer uses client funds for the build. This is not a bad thing and designed to work extremely beneficial for both parties. It’s cheaper for the developer to pay interest to the investor (commonly 3% – 7%) than a bridge-loan or other forms of borrowing.
Bridge-Loan is a short-term loan used either until permanent financing has been obtained or money has been earned from profit eg: completion of a project.
Contractor funded is if a developer works with a large contractor to build-out the project, the contractor may provide funding.
Development Finance companies that specialise in residential and build loans only. There is a range of different types of finance to suit the developer: build to let, commercial; mezzanine.
Peer-to-Peer is another investment model going on behind the scenes. Instead of the buyers funding the build, the developer will borrow from a company who has attracted “lenders” earning a fix term interest paid monthly on the money they lend.
Self-funded – while this may not be the most common way for a developer to finance a development – often there is not enough profit from one development to fund the entire next project – certainly a contribution of developer-funds could get a project off to a great start.
Combination – with a brief overview of the most common developer lending and funding options, it is often the case there will be a combination of two of the above eg: Bridge loan and Buyer-funded.
How does the fixed assured rental income work?
For many UK university cities and towns demand far outweighs supply and therefore purpose-built student accommodation has been able to secure an average occupancy of 99% across the UK (CBRE)
- The developer will employ the services of an established student management and letting company or have a division within its development group.
- An achievable annual rental appraisal is worked out – along with realistic service charge and management fees.
- The appraisal will consider all variables e.g: area, exactly where the development is in relation to the campus and town centre, void-periods, utilities, insurances, service charges, maintenance etc.
- Based on figures produced by the management company division the developer can offer the investor a fixed assured rental income of X% p.a. for X number of years.
- Developers are so confident after this process that the assured rental is built into the purchase contract of the property.
- This will be in place for a minimum duration of the assured rental period and is transferable at resale.
What happens after the fixed assured rental period?
Before your assured rental income period ends, your property management company will contact you about continuing with them in their current capacity:
- Ensuring your property is tenanted
- Payment of utility bills and maintenance and repairs
- Transparent statements and paying your net rental directly into your bank account
Annual rents increase approx 2-3%p.a. During your fixed assured rental period rental rates are gradually increasing year-on-year, so by the time you are out of your assured period, you should be earning more per annum than the fixed assured rental amount.